We’ve all heard this saying at some time or another. But what, exactly, does it mean… really? The answer to this question is something I’d like to explore. It has a lot to do with the time value of money.

But first, let me introduce myself as financialnut’s first ever guest poster! My name is Alexandra Shipp… that’s right: Trevor’s famous (or infamous, depending on how you choose to view it ) wife! He has been asking me for some time now if I would impart some words of wisdom on his blog, and I’ve finally decided on a topic to write about. But a tid bit about me: I currently attend Brigham Young University majoring in Business Management with a general emphasis. I’ve sort of formed it into a “personal” double emphasis of entrepreneurship and marketing. One important thing to know about me is that I really can’t decide what I want to do with myself, so I spend a lot of time learning things all over the board. That’s why I chose business–it leaves me plenty of options for some sort of future career.

Anyhow… back to our topic! So why is a dollar today worth more than a dollar tomorrow?

1) Inflation: We all know what this is… say you stuff a dollar under your mattress today and keep it there for 50 years. When you finally take it out in the year 2058 you probably won’t even be able to buy a third of your favorite candy bar. That’s right… the dollar grows weaker every year due to inflation! And don’t ask me why it happens. I really can’t remember from all my finance and accounting classes. I’m sure there’s a perfectly good reason, but no matter what the reason, we still have to plan for it–about a whole 3% a year.

2) The Time Value of Money: Essentially, this is the exact same thing that I just explained above, but it’s a more general term to describe any type of interest rate that you may earn on your money.

To illustrate my point, let’s look at a retirement savings plan!

Scenario 1: You start saving $500 a month at age 30, you plan to retire at age 65, and you’re investing in some sort of account that earns 12% a year, compounded monthly (the average growth of an index fund).

This means by retirement, you will have saved $3,629,479.30! That’s a difference of $414,144.56 –by starting only ONE year earlier! How can that be? It’s because the money you save in the very beginning is compounded over and over and over and over again, and the money you save right before retirement only gets compounded a few times before you retire. This proves that a dollar today, if you start saving NOW, will be very fruitful for you in the future–more so than any future dollar, even a dollar tomorrow! Wow.

That’s why my husband and I try to save as much as we can starting now so we can retire early, and retire richer than we would if we started saving tomorrow.

Don’t take this law for granted. Start saving anything you can today. Anything is better than tomorrow’s money. That’s the time value of money!

Thanks for letting me “preach” to you–I’m sure most of you already knew this!

One Response to “A Dollar Today…”

[…] IRAs, and any other good investment account with a tax shield. If you understand the principle of the time value of money, you’ll know that inflation is the enemy and compound interest is how we combat it! […]